The Emperor’s New Clothes: why Old Firms Fail

A quick search online reveals that half of the Fortune 500 firms of the year 2000, have by now ceased to exist, either because they have been merged with other firms, or because they have gone bankrupt. Look at the really long term, say 60 years back, and only one in ten firms are still on that list. What’s going on?

If big businesses are those that benefit from advantages like economies of scale, strong capabilities, high R&D capacity, and advantaged access to investors, politicians, and other actors, then why do so many big businesses fail to survive over the long term? A lot has been written about this theme, and one explanation may be that such firms find it difficult to innovate – not in the sense of coming up with new products, but in the sense of coming up with the next “big thing”.

Managing New Business Models in Old Companies
In our recent MIT Sloan Management Review article we discuss some of the things managers need to look out for when trying to launch new business models in old companies. Our research points to three key areas of tension almost any existing business will face if it attempts to discover entirely new business models. Whether management succeeds in handling those tensions will determine their success in identifying and implementing new business models.

1.  Don’t settle too quickly on structure. Experimenting with the right structure to accomodate both old and new business models is an important dimension of business model innovation.

2. Balance top management support and experimentation. On the one hand, developing new business models will only be successful if the initiative is supported by top management. For example, such new business models may take time to become profitable. On the other hand, top management need to let people involved engage with the necessary experimentation, and not try to control or limit creativity.

3. Expect a power struggle for resources. A tension is bound to emerge concerning how many resources to devote to the old core business, and to the new emerging one.

As we note in the article: “The tensions we highlight imply that the design of an organizational structure that accommodates both new and older business models needs to be considered an intricate part of business model innovation. Organizational design has to be questioned and experimented with as part of the exploration. A top management team that is prepared for such exploration and aware of the organizational dimension of business model exploration may well be more likely to succeed at business model innovation.

To cite: 

Sund, K. J., Bogers, M., Villarroel, J. A., & Foss, N. (2016). Managing tensions between new and existing business models. MIT Sloan Management Review, 57(4), 8.